Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Tuesday, July 31, 2007

As I expected, the deadline for filing 2006 NJ Homestead Rebate and Property Tax Reimbursement (PTR-1 and PTR-2) applications has been re-extended to October 31, 2007. The original June 1st deadline had previously been extended to August 15th.

The deadline for filing these applications had been extended and re-extended, ultimately to October 31st, in past years – so there was no doubt in my mind that they would also be so extended this year.

The NJ Department of the Treasury has also announced that the first set of 2006 NJ Homestead Rebate checks – those for senior and disabled homeowners and all qualified tenants who filed their applications by the original June 1st deadline - will be mailed out beginning today.

Senior and disabled tenants will receive a check for between $160 and $860, depending on their income. All other qualified tenants will receive between $80.00 and $350.00, up from last year’s maximum for non-senior, non-disabled tenants.

Rebate checks for non-senior, non-disabled homeowners who filed their application by August 15th will be mailed out in the fall.

For more information on the NJ property tax rebate and reimbursement programs go to the NJ Division of Taxation website. Information is also available on the NJ UPDATE Page at my website.

· A new "Get Ahead" tax credit to match up to $500 a year in savings for families earning up to $75,000 – that could be used for retirement, college education, buying a home, investing in a small business or during a financial or medical emergency, and new "Work Bonds" to offer additional targeted savings incentives for low-income families.

· Expanding the Child Care Credit to pay up to 50 percent of child and dependent care expenses up to $5,000 and make it partially refundable, and allow stay-at-home parents to help pay for child care for newborn infants.

· Tripling the Earned Income Tax Credit for single adults and cuting the marriage penalty.

To pay for these tax cuts Edwards plans to:

· Raise the tax rate on capital gains to 28 percent for the most fortunate taxpayers – taxing the investment income of the wealthiest Americans similarly to the wages of the middle class.

· Repeal the Bush tax cuts for the highest-income households and keep the tax on very large estates (above $4 million for couples).

· Declare war on offshore tax havens by cracking down on tax shelter promoters, cooperating with allies to fight tax havens, and closing the "tax gap" by improving IRS customer service, simplifying tax filing, auditing more large corporations and high-income individuals and requiring more third-party reporting.

· Close unfair loopholes like the tax breaks for hedge funds and private equity fund managers and unlimited executive pensions.

While I am all for providing incentives to save, increasing the Child Tax Credit, cutting the marriage penalty, and cracking down on tax havens and shelters, I am against refundable tax credits (they create too much potential for fraud), expanding the Earned Income Credit (let’s call a spade a spade – the EIC is really a federal welfare program - see my commentary from TAXPRO JOURNAL) and any increase in the capital gains tax.

The WSJ article points out that Edwards is the first Democratic candidate to provide detailed tax proposals. So far Clinton and Obama have only said that they favor rolling back at least a portion of the Bush tax cuts that favor upper-income families, though Obama's aides have said he is considering raising the capital gains rate to 20%.

The Tax Foundation has posted a commentary on the Edwards tax plan in the “Reality Check for John Edwards on Who Pays Taxes” posting on its TAX POLICY BLOG. They specifically take exception to Edwards’ comment that "It should not be in America that the middle class carries the tax burden, and that's exactly what's happening”.

FYI, the TAX GIRL posted a series of interviews on tax policy with Presidential candidates earlier this year.

Monday, July 30, 2007

Did you inherit an IRA from someone other than your spouse - and did you receive a distribution from that IRA?

I said other than your spouse because a spouse can elect to treat the inherited IRA as his/her own and rollover the IRA with no current tax consequences.

While a non-spouse beneficiary cannot make such an election, recent changes have given non-spouse IRA beneficiaries more flexibility when it comes to required distributions from an inherited IRA. However, that is a subject for another posting.

First some basic information:

(1) If a person makes non-deductible contributions to a traditional IRA the amount of the accumulated non-deductible contributions are considered to be the “basis” in the IRA.

(2) The non-deductible contributions that make up the basis in an IRA are not taxed when they are distributed. They are treated as a “return of contributions”.

(3) A distribution from an inherited IRA is taxed to the beneficiary in the same manner that it would have been taxed to the deceased. According to IRS Publication 590, “If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA.” So if the deceased had a basis in the IRA than the beneficiary will also have a basis in that IRA.

(4) The non-deductible contributions are not “recovered” first, as is the case with a non-qualified ROTH IRA distribution. Each distribution from the IRA will consist partly of non-taxable basis and partly of taxable deductible contributions, if any, and earnings.

(5) The taxable portion of IRA distributions is calculated on IRS Form 8606 Nondeductible IRAs. You use the balance in all traditional IRA accounts on December 31st of the filing year, the total traditional IRA distributions for the year, and the basis in the IRA to perform the calculation. For purposes of the Form 8606, individual traditional IRA accounts are not treated separately but are “lumped together”.

Let me digress a minute. I had a client who over the years made both deductible and non-deductible contributions to his IRA. He kept the two types of contributions separate. Fully deductible contributions were deposited to one specific IRA account, while non-deductible contributions were deposited to a different account with a different trustee. However, when he retired and began to take annual distributions the combined balance in both individual IRA accounts was used to calculate the taxable portion of the withdrawals. It did not matter from which specific account the withdrawals were made.

(6) You do not file Form 8606 only in a year that a distribution from a traditional IRA is received. Form 8606 is initially filed in the first year that a non-deductible contribution is made to a traditional IRA, and one should be filed with the 1040 for each year thereafter, whether or not additional non-deductible contributions are made, to keep track of the amount of basis.

It is possible that the distribution you received from the inherited IRA may not be fully taxable. If the inherited IRA has a basis then part of the distribution is a non-taxable return of non-deductible contributions.

But how do you know if the IRA you inherited has a basis? You must discover if the Form 1040 for the decedent included a Form 8606. You should be able to find this out from the Executor or Administrator of the estate. You will need to get a copy of the final Form 8606 and you also must determine if there are any other IRA beneficiaries. If the decedent’s IRA is to be evenly divided among his four (4) children then each of the beneficiaries will get 25% of the basis.

If for some reason the Executor or Administrator cannot, or will not, provide you with this information you can try contacting the IRS for information regarding the Form 8606 and the trustee of the IRA to see if there are any other beneficiaries.

If you already know that you will be inheriting all or part of someone’s IRA you can get a head start on things by asking that person what percentage of the IRA you will inherit and if he has a basis in the IRA.

As a non-spouse beneficiary you cannot combine the basis in the inherited IRA with any basis that you may have in your own traditional IRA accounts or with any basis in a traditional IRA inherited from other decedents. So if you receive a distribution from an inherited IRA and from your own IRA in the same year, and each has a basis, you must complete separate Forms 8606 (one for the inherited IRA and one for your IRA) to determine the taxable portions of each distribution.

As with any other tax issue, you should also look into the state tax rules regarding inherited IRAs. For example, traditional IRA contributions are never deductible on the New Jersey state income tax return, so the IRA basis may be greater for NJ tax purposes than it is for federal tax purposes. NJ has a special worksheet that is used to calculate taxable IRA distributions. And New York allows a beneficiary, regardless of age, to claim a pension and annuity income exclusion of up to $20,000 on pension distributions “if the decedent would have been entitled to it, had the decedent continued to live”.

If you received a distribution from an inherited IRA in 2006 and treated it as fully taxable income on your 2006 Form 1040 you may want to go back and check it out in light of the above information. Maybe you will be able to amend your 2006 return and get a check from “Sam” and/or your state! See my posting on “Amending Your Return.”

Whether the distribution from an inherited IRA is fully or partially taxable, you may also be able to claim an itemized deduction for the federal estate tax paid on the inherited IRA balance. But that, too, is a subject for another posting.

Sunday, July 29, 2007

Since I actually did make some progress this past week on the GD extensions (2 major returns completed and 2 more written up as far as possible and “red-filed”) I decided to reward myself with an overnight to Hawley PA to see the Ritz Company Playhouse production of PLAYING DOCTOR.

I drove up yesterday (Saturday) morning, stopping for breakfast at the Park West Diner on Route 46. I had expected that gas was a bit cheaper in NJ, so I topped off the tank at one of the last gas stations on Route 206 in NJ before crossing the Delaware to Milford, PA (according to a PA trivia filler in a local adzine, “the first silent movie ever made in the US was filmed in Milford, Pike County, in 1912”). I was right - a gallon of regular was between $2.69 and $2.79 in NJ and between $2.85 and $2.99 in PA.

I had not made any motel reservations beforehand – planning to “play it by ear”. There was a NO VACANCY sign at the “Tuck Em Inn” motel, at which I had stayed several years ago, so I decided to try the “Sandy Beach Motel” on Route 6 diagonal from Lake Wallenpaupack. I was lucky that the motel had a cancellation. The room was comfortable and well air-conditioned, with a full complement of cable stations available on the tv, so I decided to reserve here for my annual vacation – this year scheduled for late August (as usual, based on the production playing at the Ritz Company Playhouse).

Before checking in I visited the Route 6 Mall outside of Honesdale for some clothes shopping at K-Mart (I got a great bargain on shirts) and to see what movies were playing at the multiplex. I was just in time to see HAIRSPRAY. I had not seen either the original John Waters movie or the Broadway production (I am listening to the original cast recording of HAIRSPRAY on the Best of Broadway program at WJAS 1320-AM in Pittsburgh through my computer as I write this posting) so it was new to me. Two “thumbs up” – John Travolta was great in drag!

For dinner I returned to “Gresham’s Chop House” across from the Lake for Veal Saltimbucca and a perfectly made Stinger.

The production I had come to see was one of comedies by the prolific team of William Van Zandt (brother of THE SOPRANO’s Steve Van Zandt and current husband of Adrienne Barbeau – Maude’s daughter from the Norman Lear sitcom, Rizzo in the original production of GREASE, and former Mrs. John Carpenter) and Jane Milmore. The team’s comedies are silly (often too silly) farces usually dealing with mistaken identities and attempted deceptions, a la THREE’S COMPANY, and the Ritz players have done several over their 35-year tenure. In this one an aspiring writer tries to convince his parents that he is a successful doctor with the help of his secretary and roommate. It was not exactly classic farce, or even rather good farce, but it had its moments and a few laugh out loud lines. The actors were ok (considering this is amateur regional theatre), with Kurt Reed standing out as hypochondriac Uncle Harold.

This morning I had breakfast at “Muggs Country Kitchen” next to the motel and relaxed while overlooking Lake Wallenpaupack on the observation deck before driving back to Jersey. Back to the GD extensions tomorrow (Monday)!

* The AccountantsWorld.com HEADLINE NEWS reported that Treasury Secretary Henry Paulson feels the U.S. system for taxing corporations is overly complex and is hurting the country's global competitiveness. The average combined federal-state corporate tax rate stands at 39 percent, compared to an average of 31 percent for other major industrialized countries. Paulson will host a conference at the Treasury Department on July 26 to begin a review of U.S. business taxes and the impact they are having on economic growth and job creation in the United States. Joe Roth at ROTH AND COMPANY TAX UPDATESprovides some quotes from businessmen speaking at this conference in his July 27th posting “Loopholes or Lower Rates?”.

* Mark Minassian of BIZ TAX LAW at about.com reports on “How to Reduce Your Chances of Getting Audited”. According to Mark they are (1) file an extension for your return, or (2) file your return by paper and not electronically. I have heard the one about filing an extension before – it has been around for a long time - although I seem to think this is an “old wives tale”. One of the surprisingly few audits I have gone through over the years was for a return that was extended twice. As for filing by paper – no wonder my clients rarely get audited. I file all my federal 1040s by paper – always have and it appears always will.

* While I have, in the past, found errors in and disagreed with items discussed in Sandra Block’s weekly YOUR MONEY column in USA TODAY, I do recommend last Tuesday’s installment “Your Money: Donated Clothes May Not Help Charities”. When donating used clothes and household items to charity you should go with the “old reliables” like Goodwill Industries, the Salvation Army, Vietnam Veterans of America or your local church – this way you are sure to be giving your items to a legitimate charity. In many cases the charity will come to you to pick up your donations. And if you are putting your donations in a “drop-off box” make sure the name of the charity is clearly indicated on the box. While these boxes may be convenient it is “more better” to drop off your donation at a local Goodwill or Salvation Army store or donation center, where you can get a signed receipt.

* WEB CPA WEEK reports that IRS Acting Commissioner Kevin Brown is following his former boss Mark Everson to the American Red Cross. Brown was named Acting Commissioner when former IRS Commissioner Everson left in April to become President and CEO of the Red Cross. Brown will leave the IRS in mid-September to become the organization’s Chief Operating Officer. During Everson’s tenure as IRS Commissioner Brown was his chief of staff. Deputy Commissioner Linda Stiff will replace Brown as Acting IRS Commissioner.

Friday, July 27, 2007

Let’s end this week of summer rerun travelogues with one of my favorite destinations – the City by the Bay.

The National Association of Tax Professionals finally scheduled its annual conference in San Francisco for 2004 (the association's 25th anniversary), as I have been suggesting each year in my conference evaluation. So of course I signed up as soon as possible. This was my 15th NATP conference in 17 years of membership (I missed 2002 and 2003).

The conference was held at the Hyatt Regency Embarcadero Center. However, when in town I like to stay in the Union Square/Nob Hill area, near the theatre district. For this trip I selected the Hotel Union Square, a "boutique" hotel on Powell between Ellis and O'Farrell, across from "Lori's Diner" and a clothing store called "fcuk". The hotel was not air-conditioned, but merely opening the windows a bit provided lots of cool air.

The total cost of the trip, with airfare, hotel and airport shuttles, which was booked through www.expedia.com, was about the same as the cost of just the room would have been had I stayed at the Hyatt, even with the reduced conference rate!

Each morning of the conference I walked from Union Square to the Embarcadero Center (yes I did!), usually down Market Street, walking back the first day and taking the California Avenue cable car the second and the historic F Market streetcar the third. The Market Street route avoided the steep hills for which San Francisco is famous.

On Wednesday and Thursday, during the lunch breaks, I enjoyed free noon-time concerts in the Justin Herman Plaza in front of the Embarcadero Center and across from the "Port of San Francisco" ferry terminal. A Christian children's choir from Sacramento sang on Wednesday, and on Thursday the music was provided by a jazz combo from New York City.

I was disappointed to learn that HAIRSPRAY, which I had not yet seen in NYC, had just finished a run at the Golden Gate Theatre, replaced by MOVING OUT. The other "Broadway house" offerings were BIG RIVER (saw the original), BUDDY - THE BUDDY HOLLY STORY (which I had seen on my last trip to London), THE LION KING (no thanks), and I LOVE YOU, YOU'RE PERFECT, NOW CHANGE (which I had seen in New York). I passed on all of these.

Instead I chose THE FANTASTIKS (I had never seen any production other than my own in Jersey City in the 1970s - directed by and featuring Sal Piro, famous for emceeing the midnight showings of THE ROCKY HORROR PICTURE SHOW in the Village) at the SF Playhouse, ARE WE ALMOST THERE?, a musical revue about travel downstairs in the Shelton Theatre complex, and NUNSENSE A-MEN! (which turned out to be the original NUNSENSE in drag - appropriate for San Francisco) in another room downstairs in the Shelton Theatre. I did not have far to walk, as both theatres were on Sutter Street between Powell and Mason.

Each theatre was smaller than the last. THE FANTASTIKS had 100+ seats, ARE WE ALMOST THERE? had 75+ seats, and NUNSENSE A-MEN! had 50+ seats, all "general admission" seating.

In the past I always purchased my tickets at the box-office. This trip, for the first time ever, I took advantage of the local "half-price day-of-performance" ticket booth, called "TIX Bay Area", which was located in Union Square. Unlike the TKTS Booth in Times Square there was no long line. Tickets are one-half the box-office price plus a service charge. THE FANTASTIKS was $19.00 and ARE WE ALMOST THERE? was $15.50. Unfortunately I had to pay the $25.00 full price for NUNSENSE A-MEN! because it was not available at TIX.

I had meat-loaf and a strawberry sundae at the 50s-themed "Lori's Diner" on my first night in town, and lobster ravioli at the "Eclipse Cafe" in the lobby of the Hyatt on Thursday evening. My "pre-theatre" dinners were at the nearby "Burger King" and a street side Pizza stop.

Although the conference ran four days, I arranged it so that I was finished with all my classes by Friday afternoon. Saturday morning, after breakfast at "Lori's Diner", I headed for the cable car "queue" on Powell, which was surprisingly short, and piled on the Powell-Hyde car headed for Fisherman's Wharf. I started at Ghiradelli Square and walked through Victorian Park to The Cannery, and down Jefferson Street to Pier 39.

I roamed the crowded pier and stopped to watch a comic juggler perform on the Crystal Geyser stage. I went to visit the sea lions but was truly surprised to find, instead of hundreds of the mammals lounging on the docks of the West Marina, one lone sea lion in the water.

While I walked through some of the stores on the pier, the extent of my shopping activity was to replenish my inventory of cat-themed birthday cards at "Poster Source". I had a leisurely lunch of chowder, salad, crab cakes, and mint ice cream cake at the "Sea Lion Cafe" overlooking K-Dock (the bill included a 50 cent "minimum wage fee" charge) before riding the historic F-Line streetcar back to Powell Street.

As mentioned above, the trip was booked as a package through www.expedia.com, as was my last visit to Frisco in 2002. Once again everything went smoothly.

For another first, on this trip, instead of taking a taxi to and from Newark Liberty Airport, I decided to drive, parking in the off-site Vista lot (I had reserved online) and being shuttled to the terminal. Upon my return, instead of having to queue up and wait for a cab, once I retrieved my checked bag I called Vista and was promptly picked up and taken to the lot, where my car was parked out front waiting for me. The entire cost for parking for six full days, including a 15% airport tax and tips, was $74.50, probably a buck or two less than I would have paid for taxis. The only downside was having to find a parking spot when I got home.

I thoroughly enjoyed the 69 and 70 degree days in San Francisco, while it was in the high 70s and low 80s in New Jersey.

Thursday, July 26, 2007

This year the 25th annual National Association of Tax Professionals National Conference and Expo (I have been attending since 1988, missing only one or two over the years) was held at the Marriott Copley Place in Boston. I have been to Boston many times over the years, including the 1995 NATP conference also at the Marriott Copley Place.

The hotel, adjacent to the Copley Place shopping mall (which connects to the Back Bay train station) and connected by "skywalk" to the Shops at Prudential Center mall, is excellently located. It is within walking distance of the theatre district, Boston Commons, and Boston's "Restaurant Row" and shopping district. The subway makes it relatively easy to get to the downtown and waterfront areas.

Because of the increasing cost of conference hotel rooms (advertised at $149 per night but actually $167+) I allowed long-time friend Carmen "the Bear" Ceraolo to join me to cut costs. He offered to drive, as he had done on one of our previous trips to "Beantown" (thinking about it I do not believe that I ever had beans while in Boston), which provided additional savings. The drive from Wayne NJ was 234 miles each way. Travel time was a little under 4 hours going but 6 hours on the return trip due to Carmen's excessive caution driving in the rain. It cost $160.00 to park at the hotel in Boston for our stay - but the total cost of taking the car was much less than if I had parked my car at Journal Square for the week and taken Amtrak. I certainly would not recommend driving while in Boston, which we did not do. One night we made the mistake of taking a taxi to the waterfront during rush hour instead of taking the subway, which proved to be long and expensive trip due to traffic.

My days were devoted to the conference educational sessions. Carmen was on his own, visiting the hotel health club, the library at Copley Square, and taking the hop-on, hop-off trolley tour. We met each evening for dinner. Sunday night we chose the hotel's "Gourmeli's" where I had clam chowder and lobster roll. We also dined at the "Champion's: sports bar and restaurant in the hotel lobby, the Marriott's only other dining choice, "Applebees" on the street level of the Prudential Center mall, and "Sola's Irish Pub" in the lobby of the Lennox Hotel (the Shepherd's Pie was almost correct - lamb and beef and potatoes). "Flamer's" in the international food court at the Shops at Prudential Center mall offered me an excellent, and reasonable, alternative to the hotel's $19.00+ breakfast buffet.

On this trip I finally took the "Duck Tour", which now also departs from directly across from the street from the Marriott. I had previously ridden the "Duck" (a renovated WWII amphibious landing vehicle, code-named DUKW, which played a crucial role in the D-Day invasion) in Washington DC and Branson MO. We drove throughout Boston, splashing into the Charles River for a brief mid-tour cruise.

I was disappointed that there were minimal theatre opportunities available, apparently because it was summer. I had checked online before the trip and found only MENOPAUSE, THE MUSICAL to my liking. However, once in Boston we were told it had closed. Our only options at the Copley Square Bostix booth (similar to TDF's half-price booth in Times Square) were the BLUE MAN GROUP (no thanks), a production of CINDERELLA (again, no thanks) and the audience-participation farce SHEAR MADNESS, which Carmen and I had seen on our first visit to Boston many years ago.

Around town we came across many individually-decorated ceramic cows, part of "Cow Parade Boston", similar to the ceramic deer I encountered in Honesdale in the summer of 2004 (the "Wayne Deer Games") and the ceramic elephants and donkeys in Washington DC in 2002 (I believe the concept began with cows in Chicago). The Boston cows were to be auctioned off to benefit the Jimmy Fund charity.

Our last evening in town we booked a 3-hour dinner cruise on the waters of Boston Harbor aboard the Odyssey, leaving from Rowe's Wharf. The dining room was more than half empty, so we had a table to ourselves. While the ambiance was elegant, the food very good and served at a relaxed and leisurely pace, the live combo entertaining, and the views of the night-time skyline from the observation deck beautiful, it was a bit pricey, especially when you added in drinks.

It was a pleasant get-away, with the weather, like Mary Poppins, practically perfect for the time of year. Unfortunately, once again, the GD extensions were still waiting when I returned to Jersey City!

Wednesday, July 25, 2007

According to the article, “for the past year, a special Colombian police unit has been locking rats in cages with cats as part of a project to train the rodents to sniff out the more than 100,000 landmines planted mostly by leftist rebels across this conflict-wracked Andean country. ‘Here the cats play with the rats instead of attacking them," Mendez said. "The cats wear shields on their nails so they can't cause any injuries and as a result the rats feel comfortable playing around them.’”

If cats and mice can work together for the greater good – why can’t Democrats and Republicans?

This year the National Society of Tax Professionals' annual conference was held in San Antonio, Texas (August 26-31, 2004) at the Marriott San Antonio Rivercenter, not to be confused with the Marriott San Antonio Riverwalk, which is across the street.

This was my third visit to the great state of Texas. A relocated client had flown me down to a suburb of Houston to do a tax return in the early 1980s, and I attended the NATP national conference in Corpus Christi in 1997.

I was indeed pleased to find that my Continental flight to San Antone was empty. For a change I had the entire 3-seat row to myself.

As expected, the weather in South Texas was truly "brutal", with 92-96 degree days. I was fortunate that my hotel was attached to the Rivercenter Mall, 125 shops and restaurants sandwiched between the Foley's and Dilliard's department stores. Not because of anything to do with shopping, which in my case was limited to visiting the "Cats Cats Cats" pet-themed specialty store, but because it allowed me to remain in air conditioned comfort as long as possible!

When I heard that the convention was to be held along the San Antonio "Riverwalk" (El Paseo de Rio), I assumed that it would be a developed waterfront similar to ones I had been to in Norfolk, Savannah, and New Orleans. I was surprised to discover that it was more like Venice, with a very narrow river winding through the city. The Riverwalk, a WPA project completed in 1941, is 3 miles of pathway along the banks of the river that is 20 feet below street level and features unique footbridges, lush green foliage, and unique retail shops and restaurants.

After settling in and walking through the Mall, I enjoyed a "Bellini" frozen cocktail, lobster ravioli and cheesecake at "Luciano on the River" on the River Level of the mall next to the entrance to the Marriott. After dinner I saw "Alamo...The Price of Freedom", a 45-minute film about the 13-day siege and fall of the Alamo at the IMAX Theatre in the Rivercenter Mall.

Friday morning I had breakfast at a "Denny's" across the street from my hotel, avoiding the long line waiting for a table by eating at the counter, and signed up for the San Antonio City Tours' half-day "Highlights of San Antonio" at the Alamo Visitor Center in the lobby of the Menger Hotel.

The "Highlights of San Antonio" began with a "self-guided" tour of the Alamo. Originally established in 1718 as "Mission San Antonio d Valero", the city's first mission, the Alamo is the most famous spot in Texas. It is where Davie Crockett, Jim Bowie and 188 others died fighting for independence during a 13-day siege by the army of General Antonio Lopez de Santa Ana that began on February 23, 1836.

As per instructions received when I signed up for the tour, I met the tour bus outside the Alamo at 2:15 pm and was surprised to learn that there were only two other people on the tour, a couple from Westchester County NY who had signed up for the all-day "Grand Tour". During the morning they had visited the Japanese Sunken Gardens, taken the River Cruise, seen the Alamo film at the IMAX Theatre, and lunched at the Rivercenter Mall. We made stops at two of the city's five missions, Mission San Jose and Mission Concepcion, and Market Square, home of the 32-shop El Mercado and the 80-shop Farmers' Market Plaza. I had a frozen Margherita at El Mercado.

San Antonio City Tours also operates the Alamo Trolley, which does a one-hour tour of the city. As with similar trolley operations in other cities, one can hop-on and hop-off the trolley at various locations throughout the day.

After registering for the convention, and changing clothes, I visited the historic Menger Hotel, built in 1856, which is located next to the Mall. I had a cocktail in the hotel's bar, where it is said that Teddy Roosevelt recruited his "Rough Riders". Dinner was pizza from "Sbarro's" in the Mall's food court.

Saturday morning started with a free continental breakfast at the convention, followed by a full day of educational sessions. For dinner I had hot dogs from "A+W" and ice cream from "Marble Slab Ice Cream" in the Mall while listening to the Peruvian band "Andean Fusion" perform at the outdoor "lagoon".

While educational "break-out" sessions were scheduled for Sunday afternoon, I decided to take the day off. I returned to "Denny's", even more crowded this morning, for breakfast. Later I enjoyed a 35-minute narrated Rio San Antonio Cruise on an open-air flat-bottom boat, which I boarded just outside the River Level entrance to the hotel. After cooling off with a "smoothie" at the lagoon, I ventured off along the Riverwalk, this time via "Shank's mare", taking a brief detour through the "La Villita" historic arts and crafts district. I had another Italian dinner that night at "Pieca d'Italia" along the Riverwalk under the Crocket Street Bridge.

Monday repeated Saturday's schedule, with a free continental breakfast and a full day of educational sessions. I returned to the food court for dinner, pizza from "Cento and Fanti" and ice cream from "Marble Slab Ice Cream".

Walking home from dinner on Sunday I found that San Antonio has a "Pat O'Brien's" (a "branch" of the original New Orleans bar and restaurant) across the street from the Alamo. After dinner I headed there hoping to find dueling pianos in the bar (like New Orleans), but was disappointed to learn that the bar was only open on Thursday through Saturday nights.

On the cruise I had learned that the river is drained every January, during which time the annual "Mud Festival", complete with a Mud King and Queen, is held. Apparently this is the best time to visit San Antonio, as the hotel room rates are at their lowest and the daytime temperature drops to between 40 and 50 degrees.

My return flight on Tuesday was in the afternoon, so I "slept in". For the first time since the increased airport security measures were put into place, my checked bag was opened and searched at the San Antonio Airport; it apparently was not a random search. Unfortunately, unlike my flight in from Newark, the one home was a full one.

Tuesday, July 24, 2007

Just a reminder – the federal minimum wage for “covered, non-exempt” workers goes from $5.15 to $5.85 per hour today.

Why make the change on a Tuesday at the end of the month? Congress certainly was not thinking of the payroll industry when choosing this date. A bit of a PITA for those who are preparing weekly or bi-weekly payroll for employees earning minimum wage. But then making the increase effective on a Monday or the first day of the month would have been too simple, or sensible, for Congress.

This is the first of three annual increases in the federal minimum wage. It goes to $6.55 on July 23, 2008 and $7.25 on July 24, 2009.

FYI, 30 states already have a minimum wage that is higher then the new federal rate. The minimum wage for NY and NJ is $7.15.

The 70 cent increase is a lot more than the 7½ cents that employees of the Sleep-Tite Pajama Factory fought for in PAJAMA GAME. However that was in the mid-1950s. When you take into consideration 50+ years of inflation it appears that the Sleep-Tite workers got the better deal.

This year, instead of having one National Convention, the National Society of Tax Professionals offered Regional Conferences that corresponded to four of the six IRS-sponsored National Tax Forums, held on the two days before the Forum. I was pleased to find that one of the selections was Chicago. I had been to Chicago twice before, but each time was only for a few hours between Amtrak trains on one of Peter Calleo’s cross-country train tours. I looked forward to a real visit.

I had originally hoped to travel to Chicago via Amtrak, but because I had to do a payroll on the morning of July 8th I was forced to fly. The train trip takes about 26 hours, and I would not be able to get to Chicago in time for the first day of the NSTP conference.

I parked my car at the VISTA lot and took the shuttle to Newark Airport. As my flight was on Continental, the shuttle let me off at Terminal C. However, when I went to queue-up to check my bag I was told that Continental flights to Chicago (and a few other US cities) left out of Terminal A – so I had to schlep my bag to the AirTrain and to Terminal A. During take off a child in front of the plane screamed continually at the top of his lungs (“I want to go pee now!”), and repeated his performance, with a different demand, as we landed. I am a firm believer in the old adage that children should be neither seen nor heard.

Upon retrieving my bag at O’Hare I followed the signs for a long hike to the Shuttle/Bus area. I asked the person at the information desk where to go to buy a ticket for the hotel shuttle and was told there was no need for a ticket. I should just wait outside for the appropriate hotel van. This sounded a bit odd, as I had read somewhere that the shuttle cost $25.00, but I assumed she knew of which she spoke and followed her instructions.

A van for each hotel (Marriott, Holiday Inn, Western, etc) came and went, but no Hilton (FYI the Airport Hilton was directly across the street from where I was waiting). After a while I went back to the Information Desk and told the women I wanted to go to the Chicago Hilton downtown. The “cafone” told me, as if it was common knowledge that I should have known, that I had to go outside and walk back to a Terminal to get a downtown shuttle. The free shuttles were only for airport hotels. I hiked back to the Terminal and finally got a Airport Express shuttle to my downtown hotel, which did indeed cost $25.00 one way or $46.00 round-trip.

The NSTP Conference and IRS Forum were held at the Chicago Hilton and Towers on South Michigan Avenue. Originally the Conrad Hilton, when built in the 1920s it was the largest hotel in the world. While the facilities and services of the hotel were fine, I would have preferred to be at the Palmer House Hilton or some other hotel closer to the theatre district and a wider selection of reasonably priced dining options. The hotel was across from Grant Park, which borders on Lake Michigan, but the combination of summer heat and my girth prohibited me from exploring too much of the park.

There were three restaurants located in the lobby of the hotel. I dined at Pavillion (enjoying a Chicago-style deep-dish “personal pizza”) and Kitty O’Shea’s Pub (Newkie Brown Ale and what was identified on the menu as Shepherd’s Pie – although as is often the case in the US it contained beef and not sheep). As one would expect, the prices were on the high side. One Stinger at the hotel cost more than the two Stingers I had enjoyed at dinner a week earlier during my stay in PA. I had ventured north on Michigan Avenue on Sunday night looking for a more reasonably-priced dinner option with more menu choices, but was not successful. I also checked Wabush Avenue (behind the hotel) within a comfortable walking distance and found only a Subway franchise and the cafeteria-style Chicago Carry-Out. I eventually discovered the Savoy Restaurant in the Essex Hotel one block south of the hotel with a very varied and reasonable menu.

While the NSTP did provide a free continental breakfast, the IRS gave participants nothing. I was not going to spend $20.00 for breakfast at the hotel, so I had most breakfasts at the Chicago Carry-Out in the Travelodge one block north of the hotel. They had very good French toast and pancakes.

Prior to the trip I had ordered a ticket for a taping of the Chicago Public Radio’s WAIT, WAIT…DON’T TELL ME, which I listened to on the local public radio station on Sunday mornings, on the last night of my stay for only $20.00. I had also checked out the various theatre offerings online. The cost of any ticket I would purchase online would be inflated by $10.00++ in various processing and mailing fees, so I decided to wait and purchase any tickets at the box office. The Sunday paper’s Chicagoland Theatre Directory advertised productions of MOVING OUT, THE 25TH ANNUAL PUTNAM COUNTY SPELLING BEE and WICKED, shows which I either did not want to see or could see in NY via TDF. There was also THE RAT PACK IS BACK, which I had seen in Vegas, and a “Broadway bound” one-man show with Martin Short, whom I can do without. Another apparently pre-Broadway offering, Tommy Tune in DR DOOLITTLE, which I would have gone to, did not open until July 18th. A live version of THE BLUES BROTHERS that I had looked at online was not advertised. So no theatre this trip.

I scheduled my IRS Forum educational sessions, each one lasting 50 minutes, so that I had most of Wednesday free for the American Sightseeing (aka Gray Line) Grand Tour, “a comprehensive tour of everything Chicago has to offer”. After explaining that the name “Chicago” comes from an Indian term meaning “smelly city”, our knowledgeable driver took us through “the Loop”, an area of down-own surrounded by a rectangular section of Chicago's elevated "L Trains", along the “Magnificent Mile” shopping area, and throughout the North Side and South Side business and residential districts, passing all the various sports venues and museums. Everywhere you looked high-rise luxury condos were being built, or converted from former hotels and office buildings.

You could also see America’s “Second City” via the hop on hop off Chicago Double Decker Company Tours. In addition, free Trolleys run on several routes, serving popular visitor, cultural and shopping destinations such as Navy Pier, the Museum Campus, Michigan Avenue and Lincoln Park Zoo - with dozens of stops in between.

When not on tour, WAIT WAIT…DON’T TELL ME tapes Thursday evenings at the Chase Auditorium in downtown’s Chase Tower. While a bit of a hike, I walked to and from the Tower. The “oddly informative news quiz” stars Peter Sagal and NPR icon Carl Kasell and features a three-member “celebrity panel” as well as a weekly celebrity “contestant” via telephone. This was the second Public Radio taping I had attended, having been in the audience when A PRAIRIE HOME COMPANION visited the Great Auditorium in Ocean Grove last year. The panel for my taping included writer Ray Blount Jr, a rehabilitated Paula Poundstone, and movie critic Richard Roeper of “Ebert and ”. Comedienne, actress and outspoken liberal Janeane Garofalo was the telephone guest – she got all three of her questions wrong. I picked a good night - in addition to the weekly show they also taped two segments for an upcoming pledge week episode. We were promised cookies on the way out if we stayed all the way till the end!

Due to the IRS National Tax Forums the hotel was booked solid for the week. It was also fully booked for the next week, when it would be headquarters for the annual “Gay Games”. The IRS and the gays at the same hotel. There is a politically incorrect comment just dying to be expressed, but I will take the high ground. I am glad I would not be in Chicago for another week. Not only would the hotel be overrun by gaiety, but it was forecast that it would be in the 90s during the day!

The process of flying home from went much smoother than that of getting to Chicago – there was no misdirection or screaming brats! Within an hour of “deplaning” I was being greeted by two hungry cats. I enjoyed my visit to the “windy city” and look forward to returning now that I am familiar with the layout.

Monday, July 23, 2007

It is called the “WANDERING” TAX PRO, so this week my “summer reruns” will deal with some of my wanderings. First up – a visit to Minneapolis from July 2005.

This year's National Association of Tax Professionals annual conference was held in Minneapolis, Minnesota, at the Hilton Towers. It was my first visit to the "land of 10,000 lakes".

I prefer to fly non-stop if at all possible, but my online research indicated that I would save $150+ going via ATA with a stop each way in Chicago. It turned out that on both ends the plane would be going all the way to my final destination, so when we stopped in Chicago I did not have to change planes, or to even "deplane". On the first leg of the trip, both coming and going, I could spread out, as the middle seat in my aisle of 3 was empty.

The hotel was excellently located in the heart of downtown, diagonally across from Orchestra Hall, and a block from the pedestrian-friendly Nicollet Mall, an 11-block upscale shopping and dining district. It was on Nicollet Mall, in front of the IDS Center office building, that Mary Richards made her famous "hat toss" during the opening credits of the Mary Tyler Moore Show.

After checking into my 7th floor room with a view of the downtown skyline, I explored Nicollet Mall, stopping to listen to a live band concert in Peavy Plaza, which was apparently part of the Minnesota Orchestra's annual "Sommerfest" (no, that is not a typo).

San Antonio, where I was last year, has the Riverwalk. Downtown Minneapolis has the Skywalk, a 5-mile network of privately built and maintained enclosed pedestrian bridges on the second floor level connecting stores, office buildings, theatres, parking structures, and hotels over 50 downtown blocks. I was able to avoid the rain one afternoon by going from 5th St and Nicollet Mall to my hotel at 10th St and Marquette Ave via the Skywalk.

The NATP literature said that Minneapolis is home to a theatre scene second only to New York City. Prior to the trip I had gone to Playbill.com to check out what would be playing during my visit, and purchased tickets for 2 performances online - TRIPLE ESPRESSO at the Music Box Theatre for Wednesday night and HIS GIRL FRIDAY at the Guthrie Theatre for Thursday night.

TRIPLE ESPRESSO is a "highly caffeinated" review combining elements of slapstick and vaudeville created by three solo performers, a musician, a comic, and a magician, as something they could perform as a trio. It premiered in 1996, and has been running at the Music Box since the spring of 1997 with various casts.

During the 25th anniversary of a lounge lizard's run at the Triple Espresso niteclub, the lizard's former partners visit for a reunion of the rather unsuccessful show-biz team of Butternut, Maxwell and Bean.

The show features a bit of audience involvement, with some members introduced as family of the lounge lizard (the couple sitting in front of me was identified as his parents and a girl in the first row as his wife) and a few called onstage to assist the performers. During a bit I was introduced as a college faculty advisor.

When I booked HIS GIRL FRIDAY online I had no idea who was in the cast. Upon arriving at the Guthrie I was pleasantly surprised to find that the show starred real-life spouses Angela Bassett and Courtney Vance. It also featured familiar television faces Reginald Vel Johnson (FAMILY MATTERS) and Peter Michael Goetz.

HIS GIRL FRIDAY is John Guare's (SIX DEGREES OF SEPARATION) adaptation of the Howard Hawks movie version of the classic Hecht and MacArthur play THE FRONT PAGE. As in the movie, which starred Cary Grant and Rosalind Russell (and which was updated to television journalism as SWITCHING CHANNELS with Burt Reynolds and Kathleen Turner in 1988), the role of reporter Hildy Johnson is changed from a man to a woman, the ex-wife of editor Walter Burns.

This production, the play's US premiere, is the opening show of the Guthrie's 2005-2006 season, its last season at the current Vineland Ave location, Guthrie's home since 1943. A new facility is currently being built along the Mississippi River.

Despite having ordered the tickets online (HIS GIRL FRIDAY directly from the Guthrie Theatre website and TRIPLE ESPRESSO via Ticketmaster), my seats in both theatres were excellent. Actually, neither theatre really had any bad seats. My ticket for HIS GIRL FRIDAY, certainly a Broadway-quality production with a Broadway-quality cast, was only $46.00, plus a $2.00 "handling fee"! The ticket for TRIPLE ESPRESSO was $31.50, but with various convenience and order processing charges and "additional taxes" the total cost was $41.14.

I could easily walk to the Music Box Theatre, on Nicollet Ave (aka "Eat Street") just south of downtown. I took a taxi to the Guthrie Theatre, and anticipated a queue of taxis waiting when the show was over. Exiting the theatre I was surprised to find there were no taxis, and ended up walking back to the Hilton, over a mile away, using a familiar high-rise building as a landmark.

My Quickfinder 1040 Handbook indicated that the allowable "meal and incidental expense" per diem for Minneapolis was $51.00, which is the highest per diem amount. I had several meals at Harmony's, in the Hilton lobby, which was extremely reasonable - especially for a high-end hotel restaurant. I especially enjoyed their Monte Cristo sandwich and signature Minnesota Wild Rice Soup.

I did dine out one night, al fresco, at Brit's Pub and Eatery, across from Peavy Plaza on Nicollet Mall, enjoying cool breezes, Shepherd's Pie and "Newkie Brown" ale. Brit's also has a roof-top garden with an 11,000-square foot lawn bowling green.

My only disappointment was with the Mall of America. It turned out to be just a mall - a really big mall with an amusement park (Camp Snoopy) in the middle - but nevertheless just a mall. I had hoped there would be more variety in the types of stores, but it pretty much had the same stores as any other mall, just more of them. I found a cat and dog themed store, Bow Wow and Meow, but it was small, with limited inventory, and expensive. There was a Dollar Store, but it had nothing that I couldn't get in a local Dollar Store for the same price. I had set aside too much time, hoping to have dinner at the resident Italian restaurant. But after 2 1/2 hours I was bored and headed back to the hotel.

Getting to the Mall was easy. I walked 5 blocks to the Nicollet Mall light rail stop (Metro Transit Hiawatha Line Route 55), purchased by $1.50 ticket at the machine, and took the 40 minute ride to the last stop, passing the Metrodome and the airport along the way. I made the return trip at 3:30 pm, which is considered to be within the "rush hours", so that ride cost $2.00. Similar to my experience on the Hudson County Light Rail, no one checked my ticket on the trip to the Mall, and I was only checked as we approached my stop on the way back.

Instead of going to the Mall in the afternoon, I should have taken the half-day Twin Cities PM motorcoach tour offered by Metro Connections, or toured Minneapolis on the hop-on, hop-off River City Trolley, and gone to the Mall in the evening for dinner.

Once again I parked my car at VISTA Parking while away. The drop-off and pick-up points at the various terminals had changed, apparently due to security concerns, but the process continued to be smooth and "more better", and cheaper, than queuing up for a taxi. I even found a parking spot across from my apartment back in Jersey City when I returned home at 7:30 pm on Friday!

Saturday, July 21, 2007

* The Tax Foundation has added a new section to its website dedicated to the dreaded Alternative Minimum Tax (AMT). The new section includes the Foundation’s recent proposal for reforming the AMT, a history of AMT tax returns and liabilities from 1970 to the present, information on the % of tax returns subject to the dreaded tax by congressional district, state, major city and county. It also allows one to search for AMT posts on the Foundations Tax Policy Blog.

* GOTT IN HIMMEL! Joe Kristan of ROTH AND COMPANY TAX UPDATES reported that Friday, July 13th was Germany’s “Tax Freedom Day” – the day the average German had earned enough to pay all his taxes for the year. As Joe points out, “That means the average German worker toils more for the government than for himself.” When you complain about how much taxes we pay here in the US remember that our “Tax Freedom Day” this year was April 30th.

As an aside, the first time I heard the phrase GOTT IN HIMMEL exclaimed was some 30+ years ago when my mentor Jim Gill told a client of German extraction, a head waiter in NYC who owned several rental properties in either Union City or North Bergen, how much he owed his Uncle Sam.

* KPE, the internet’s TAX GIRL, provides a list of state sales tax “holidays” in “Sales Tax Takes a Holiday”. These are periods when a state will exempt certain items from sales tax in order to encourage spending.

* The National Association of Tax Professionals email newsletter TAXPRO WEEKLY reports that the IRS has created a new tax form - Form 8919 Uncollected Social Security and Medicare Tax on Wages - that will be used by workers who are misclassified as independent contractors. In the past, misclassified workers used Form 4137 Social Security and Medicare Tax on Unreported Tip Income, to report their share of the social security and Medicare tax. The new form will simplify the reporting process for these workers. Trish McIntire of OUR TAXING TIMES goes into a bit of detail on this new form in “New Form 8919”. While checking out the IRS Draft Forms page I discovered another new form – Form 8917 Tuition and Fees Deduction to report information on an “above-the-line” adjustment to income for tuition and fees. In the past no supporting form was needed to claim this deduction.

TAXPRO WEEKLY also tells that National Taxpayer Advocate Nina E. Olson delivered a report to Congress this week that identifies the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year. The National Taxpayer Advocate is required by law to deliver two reports to Congress each year. Through these reports, the Taxpayer Advocate Service identifies and proposes solutions for serious taxpayer problems. The Objectives Report, delivered each June, contains the goals and activities planned by the Taxpayer Advocate for the coming fiscal year. Among the key areas of focus will be improving taxpayer services, ensuring that taxpayer rights are protected in the IRS private debt collection initiative, and making the IRS offer-in-compromise program more accessible for taxpayers who are unable to pay their tax debts in full.

Here is a quote from the report’s introduction by Nina Olson – “It is likely that Fiscal Year 2007 will see the IRS begin using Private Collection Agencies to collect federal tax debts. I have opposed this program from the outset, on the grounds thatit compromises taxpayer privacy and taxpayer rights, undermines the integrity and independence of the tax system, and costs more than hiring additional IRS collection employees. Despite our best efforts to protect taxpayers during the development of this initiative, I have no doubt that problems will arise.”

* The WEB CPA WEEK email newsletter reports that former construction worker and Coast Guard employee Rhiannon O’Donnabhain is suing the Internal Revenue Service after she was disallowed from deducting $25,000 in medical expenses for her sex change operation. The IRS says that the operation was elective cosmetic surgery. Lawyers for O’Donnabhain say that she suffered from a medical condition known as “gender identity disorder”. Both a psychotherapist and a psychologist told her that a sex change operation was medically necessary. The US Tax Court has never ruled on this particular issue before.

The musical was HOW NOW DOW JONES, with book by Max Shulman (creator of Dobie Gillis), lyrics by Carolyn Leigh, music by Elmer Bernstein (the first Broadway musical for the composer of hundreds of famous music scores - perhaps his best known is the score for THE MAGNIFICENT SEVEN), directed by Broadway legend George Abbott and produced by David Merrick. The show opened in December of 1967 and ran till June of 1968.

HNDJ starred Tony Roberts in his first musical role and introduced Marilyn Mason (who would become Mrs. Neil Simon). The cast also included Brenda Vacaro, Barnard Hughes, and, in a small role as a waiter, Tommy Tune.

Marilyn Mason played "The Voice of Dow Jones", who would announce the latest average each day. Her fiancé has promised to marry her when the Dow Jones Industrial Average reaches 1,000. When she finds herself pregnant from a one-night stand with broker Tony Roberts she falsely announces to the world that the Dow Jones has topped 1,000!

The show-stopper was a song whose lyric instructed "Will everyone here kindly step to the rear and let a winner lead the way."

This “summer rerun” is a reminder of the new rules (since 1997) on the tax treatment of gain from the sale of your personal residence from October 2006.

It appears that there is still some confusion about the rules for taxing the gain on the sale of a personal residence. Many people think the “old rules” still apply. Here is a quick review.

THE OLD RULES:

In order to postpone paying income tax in the current year on the gain from the sale of your personal residence you had to “buy up” – purchase, or build, a new home that cost more than the sale price of your old home – within 2 years of the date you closed on the sale of your old home. The tax was deferred for as long as you continued to “buy up”, or until you sold your last home.

Homeowners age 55 and older could make a once-in-a-lifetime election to exclude up to $125,000.00 in gain.

These rules no longer exist!

THE NEW RULES:

Thanks to the Tax Reform Act of 1997, if you sell your personal residence after May 6, 1997, you can totally exclude from income up to $250,000.00 of gain if single, or $500,000.00 if married, regardless of your age at the time of the sale, if during the 5 years prior to the sale you owned and lived in the home for a total of 24 months (they do not have to be consecutive). The exclusion is not a one-time election – it is available once every 2 years.

If you are married and sell your home, which you and your spouse owned and lived in for 3 years, and realize a gain of $475,000.00 you do not have to pay any income tax on this gain. If the net gain is $525,000.00 you will only pay tax on $25,000.00 at the appropriate capital gains rate.

If you do not own and live in the home for a full 24 months you may still be able to exclude some, or all, of the gain if the primary reason for the selling the home is a change in employment, a change in health, or an "unforeseen circumstance". An unforeseen circumstance is described as "an event the taxpayer doesn’t anticipate before purchasing or occupying the residence".

Two recent private letter rulings give an idea of what the IRS considers to be qualified "unforeseen circumstances" -

(1) A police officer and his wife purchased a townhouse to be used as their principal residence. After signing the purchase contract, but before the closing, the officer applied to train with the K-9 unit of the police force. After moving into the townhouse the officer was notified that he was accepted to the unit. A K-9 officer is required to maintain a 6x9 foot kennel in his/her home for his/her "partner". The homeowners association for the townhouse did not permit kennels. The taxpayers sold the home before they had lived in it for two years. In PLR200504012 the IRS permitted a partial exclusion.

(2) A taxpayer purchased a home to be used as his principal residence. Less than two years later he was attacked outside of his house. The attacker put a gun to the taxpayer’s head, forced him into his vehicle, and demanded that he drive his attacker to various locations over a period of an hour. The taxpayer was forced to use his ATM card to get cash for the criminal. Traumatized by the event, and afraid to continue living in his home, the taxpayer moved and rented out the property. When the tenant moved out he sold the home. In PLR 200630004 the IRS permitted a partial exclusion.

The amount of the exclusion allowed in such a case is determined by dividing the number of months owned and used as a personal residence by 24 months and multiplying the answer by the $250,000.00 or $500,000.00 maximum allowed. If you and your spouse owned and lived in the home for 12 months you could exclude up to $250,000.00 ($500,000.00 x 1/2).

You should still keep the original Closing or Settlement Statement for the purchase of your home for as long as you own it, and maintain documentation on all capital improvements made to the home over the years just in case.

Thursday, July 19, 2007

* KPE reports on her TAX GIRL blog that “on July 18, the Ways and Means Committee passed H.R. 3056, the Tax Collection Responsibility Act of 2007, which would repeal the use of private debt collection companies for purposes of collecting federal income taxes. The Committee approved the measure by a vote of 23 to 18.”

Kelly quotes Oversight Subcommittee Chairman John Lewis as stating, “The private debt collection program is an insult to the American taxpayer and our Federal tax system”. Right on, John!

* Paul Caron, the TAX PROF, reports that “The House Judiciary Committee voted yesterday (also July 18th) to prohibit patents of tax planning methods, defined as 'a plan, strategy, technique or scheme that is designed to reduce, minimize, or defer' a taxpayer's tax liability.”

Over the years I have subscribed to many tax-related newsletters and publications of various prices and levels of quality and value. The one tax newsletter that I have consistently received for more than 20 years now is TAX HOTLINE, published monthly by Boardroom, Inc. It is currently the only print tax newsletter, other than the publications of NATP and NSTP that I receive as a member, to which I subscribe.

Not only does TAX HOTLINE provide lots of valuable information for individual and business taxpayers and tax professionals alike, but the cost is very reasonable. While the current subscription price is $59.00 as a long-time subscriber I pay only $39.00 per year. In the past I have paid more than twice that for newsletters with less than half the information and about 1/4 the value of the information reported.

The current (AUGUST 2007) issue is an excellent example of its value:

* As I have pointed out in the past, what is now the dreaded AMT was originally created when it was reported that 155 individuals with incomes over $200,000 had a “0” federal income tax liability in 1969. The issue quotes the IRS Statistics of Income Bulletin as reporting that “2,420 individuals with income of more than $200,000 owed no income tax for 2004” – despite the fact that the dreaded AMT now claims millions of victims each year.

* It points out that “The Check Sent with Your Return May Be Paying a Different Tax” and advises, “When you send a check to the IRS, always write on it specifically what tax it is to be applied against, for example ‘2007 Form 1040’." It discusses Fred A. Windover, TC Summary Opinion 2007-50. Fred filed his 1999 Form 1040 with a check for $13,178.00 – the balance due indicated on the return. However, the IRS applied $12,000+ of this check to other tax bills allegedly owed by Fred. The IRS did not tell Fred that it had done this – he only found out when he got a bill for $17,000 in tax, interest and penalties for 1999. Fred lost in Tax Court because he “didn’t provide any written instructions on or with his check as to what tax it was applied against”, so the IRS was “free to apply the check sent with the return as it wished”.

* The August 2007 also reviews the provisions of the Small Business and Work Opportunity Tax Act of 2007, tells you how to “Trim the Tax You Owe on Inherited IRAs”, and compares the “traditional” 401(k) to the ROTH 401(k).

Not every issue is as chock-a-block full of helpful advice and information as this one – but every issue provides at least one or two items that you can “take to the bank”.

Boardroom Inc is offering a special introductory rate of just $39 for 12 monthly issues of TAX HOTLINE. It is well worth the price.

The National Association of Tax Professionals provides members with a weekly email newsletter, a monthly print newsletter, TAXPRO MONTHLY, and a quarterly print magazine, TAXPRO JOURNAL, to which I have contributed in the past. The National Society of Tax Professionals publishes a monthly (for the most part) print newsletter titled FEDERAL TAX ALERT.

In addition to reporting on IRA actions, tax law updates, tax court decisions, and ethics the FEDERAL TAX ALERT also has sections titled FYI and Inside Washington to discuss non-tax issues and topics of interest to the financial professional. The July 2007 Inside Washington section leads off by telling us that the Citizens Against Government Waste has spotted 2,658 individual items of unnecessary spending, or “pork”, in the 2007 federal budget, including $1.6 Million for a project to improve the shelf like of vegetables. The “pork” totals $13 Billion, but it is down from last year’s $29 Billion, a record high.

Wednesday, July 18, 2007

This summer rerun from October of 2003 discusses the tax treatment of mutual funds. This post concerns mutual funds that invest in taxable investments such as stocks and bonds and does not deal with mutual funds that invest in tax-free municipal bonds.

I get a lot of questions, both during and after the tax-filing season, and I come across a lot of misconceptions among clients, about basic tax issues. During the next few months I would like to address some of these basic issues in this weblog. Today I want to talk about mutual fund investments.

Mutual funds make three types of distributions - ordinary dividends and capital gain distributions, which are paid out of the income of the fund, and, on occasion, a "return of capital", which is paid out of "principal".

Ordinary dividends and short-term capital gain distributions are generally (subject to the income threshold) reported on Part II of Schedule B and, prior to tax year 2003, have been taxed as "ordinary income" at the taxpayer's normal tax rate. Beginning in 2003 certain mutual fund “ordinary dividends” are considered to be “qualified dividends” and taxed at capital gain rates.

Long-term capital gain distributions are treated the same as long-term capital gains from the sale or exchange of investments. They are reported on Schedule D and taxed at the appropriate lower capital gains rate.

A distribution classified as "return of capital" is, in effect, giving back to you part of the purchase price of the fund shares, and is not taxable.

Distributions from mutual funds are taxable even if you do not actually receive the cash in your hands. Many investors elect to have some or all of the distributions reinvested in the fund. Reinvested distributions are treated as if you received a cash distribution from the fund and then turned around and used the cash to purchase additional shares in the fund, and, unless they represent a "return of capital", are fully taxable.

Dividends from a mutual fund that represent income from a direct obligation of the United States government, while fully taxable on your federal return, may be exempt from state income taxes. Such is the case in New Jersey. The mutual fund will usually send you a statement or notice in January that indicates what % of ordinary dividends are from US government obligations.

Since reinvested dividends are actually additional purchases of fund shares, they are added to the "cost basis" of your investment. Dividends reinvested over the years are added to your initial investment and any subsequent purchases and will decrease your taxable gain, or increase your deductible loss, when you sell the fund.

Let's say you invested $1,000.00 in the Flach Mutual Fund (there is no such thing) in 1995, and elected to have all distributions reinvested. Between 1995 and 2002 you received $700.00 in taxable distributions, which were reinvested in the fund. At the end of 2002 you sell all your shares in the fund for $1,200.00. You have a $500.00 long-term capital loss ($1,000.00 + $700.00 = $1,700.00 = $1,200.00 = $500.00).

Since distributions that are a "return of capital" represent a refund of your purchase price, they are subtracted from your "cost basis" when determining the gain or loss on the sale.

If you sell less than your entire investment in a mutual fund (i.e. you own 1,000 shares of the Flach Mutual Fund and sell 400 shares) there are four (4) methods available to you to determine the "cost basis" of the shares sold. These four methods are:

You can elect to use the method that will provide you with the least amount of gain or the greatest amount of loss. You can use different methods for sales of different mutual funds, but once you use a method for the sale of shares of a particular fund you must use the same method for all sales of that fund. If you use the Average Cost method to determine the cost basis for your first sale of Flach Mutual Fund shares, you must use the Average Cost method each time you sell shares of the Flach Mutual Fund.

The Form 1099-DIV you receive from the mutual fund in January identifies the amount of the various distributions for the year by category. Prior to 2003, it reported ordinary dividends (which includes short-term capital gain distributions), long-term capital gain distributions, long-term capital gain distributions resulting from property held for at least 5 years, and non-taxable distributions (return of capital), as well as any foreign tax withheld from the distributions.

For 2003, the Form 1099-DIV will have to report ordinary dividends taxed at the normal "ordinary income" rates, ordinary dividends taxed at the lower rates, pre-May 6 long-term capital gain distributions, post-May 5 long-term capital gain distributions, and non-taxable distributions. Not all dividends from mutual funds will be eligible for the lower 5% and 15% rates. “Ordinary dividends taxed at the lower rates” are referred to as “qualified dividends” on the Form 1099-DIV. And we no longer have to worry about “pre-May 6” and” post-May 5” long-term gain distributions – they were for tax year 2003 only. Beginning with 2006 the Form 1099-DIV also reported any “tax-exempt” dividends resulting from fund investments in tax-free mutual bonds.

You will receive a Form 1099-B to report the "gross proceeds" from any sales of shares in the mutual fund during the year. The mutual fund also sends a copy of both the 1099-DIV and 1099-B to the IRS.

The mutual fund may also send you an "Average Cost Statement" for the shares sold, generally using the Average Cost method. This Average Cost Statement is not sent to the IRS, but is for your information only. You do not have to use the cost basis reported on this statement to determine your gain or loss on the sale(s). You can use any of the four methods identified above, subject to the restriction I have discussed.

It is important that you give all 1099-DIVs, 1099-Bs and Average Cost Statements that you receive to your tax preparer, as well as any other year-end information, statement or notice that the mutual fund sends you.

It is also very important to save all purchase "confirmation" slips and account statements for the fund for as long as you own shares in the fund so that your tax preparer can properly calculate the appropriate cost basis when you sell the fund.

I hope you have found this posting helpful. If you have any questions about the tax treatment of mutual funds you can email me at rdftaxpro@mail.com. Or you can submit your question as a “comment” below.

Tuesday, July 17, 2007

Here is a “summer rerun” from back in August of 2003 concerning a tax change proposal I sent to George W.

In late 2002 I wrote to George W and then Senate Majority Leader Trent Lott (before he was struck down by foot-in-mouth disease) with a proposal for providing tax relief to investors. My proposal concerned excess capital losses.

Under current law, if you have a net capital loss you can deduct a maximum of $3,000.00 against other income (i.e. wages, interest and dividends, pensions, etc.) on your Form 1040. Net losses in excess of the $3,000.00 maximum are "carried forward" to future tax years.

If you had $20,000.00 in net losses on your 2001 Schedule D, you can deduct $3,000.00 on Page 1 of your 1040. The $17,000.00 balance is carried forward to 2002. This $17,000.00 is first used to offset any net capital gains, the $3,000.00 annual maximum is deducted against ordinary income, and any balance is carried forward to 2003. If you had $5,000.00 in net gians in 2002, you would hve a capital loss carryforward to 2003 of $9,000.00 ($17,000.00 less the $5,000.00 gains less the $3,000.00 deduction).

In reality, rather than having net gains in 2002, it is more likely that investors had additional net losses, increasing the loss carryforward to 2003.

I proposed that investors be given the option to "carryback" unused capital losses to be deductible against previous years' net capital gains.

I felt that this option was especially appropriate in the context of the current economic reality. During the late 1990s and into 2000, when the stock market was flourishing, many taxpayers realized, and were taxed on, large capital gains, including excessive capital gain distributions from mutual funds. In most cases these capital gains were reinvested in the market and in additional mutual fund shares.

In 2001 and 2002 the bear market provided these same investors with substantial capital losses. It seems only fair that they be allowed to carry back the losses to apply against the earlier gains of the bull market and get a refund of the taxes paid on these gains.

Allowing a carryback of capital losses would provide the economy with an immediate cash stimulus, as amended returns, filed to carry back the losses to apply against past gains, would produce current refunds. Taxpayers would not have to wait years to receive minimal annual tax benefits from their stock market losses.

An individual with $30,000.00 in net stock market gains in 2000 would have paid $6,000.00 in federal capital gains taxes, assuming the gains were all taxed at the maximum 20% rate. As capital gains increase Adjusted Gross Income (AGI), which in turn affects the deductibility of many items and most tax credits, and could cause the taxpayer to be a victim of the dreaded Alternative Minimum Tax (AMT), the actual total federal tax cost of the gains could have been much higher.

If that same individual had a $28,000.00 net capital loss in 2002, carrying back the loss, after the $3,000.00 current deduction, to apply against the tax year 2000 gains would result in a refund of at least $5,000.00.

There is precedent in the tax law for allowing the carryback of losses. For as long as I have been preparing 1040s, taxpayers have had the option of carrying back a "net operating loss" (NOL).

When I checked the contents of my "private mail box" at Global Mail last Saturday I discovered an envelope whose return address was "THE WHITE HOUSE, WASHINGTON, DC 20502". The letter inside, dated July 22, 2003 (about eight months after I had mailed my proposal to Washington), read:

"Dear Mr, Flach:

On behalf of President Bush, thank you for your letter. The President appreciates hearing your view and concerns.

President Bust remains confident in the faith and resolve of our Nation, and he is confronting our country's challenges with focus, clarity, and courage. As the President has said, this is a time of great consequence, and he is working for a prosperity that is broadly shared, strengthening domestic programs vital to our country, and answering every danger that threatens the American people.

To accomplish these goals, President Bush welcomes suggestions from all Americans. Thank you again for sharing your ideas.

Sincerely,Desiree ThompsonSpecial Assistant to the Presidentand Director of Presidential Correspondence"

Huh?

I never did hear from Trent Lott.

WHY APRIL 15th?

When the 16th Amendment was ratified, authorizing the federal income tax, the original statutory deadline for filing a tax return was March 1st.

The Revenue Act of 1918 pushed the filing deadline to March 15th. No reason was given for the change at the time.

When Congress completely revised the Tax Code in 1954, the filing deadline was changed to the current April 15. The IRS said the change was made to "spread out the peak workload". However, others have speculated that, as "Uncle Sam" had become aware of more refunds going to the middle class, extending the deadling gave the government more time to hold on to the money.

As I will be working away on the GD extensions for the next week or so, and will not have time to devote to daily postings, I thought I would take a cue from television and offer “summer reruns” of some of my posts from prior years when THE WANDERING TAX PRO was at tripod.com. Let’s start with a nostalgic posting from Monday, October 16, 2006. rdf

Today is the deadline for filing your extended 2005 Form 1040 (and state return) to avoid paying a penalty for late filing (5% of the balance due per month) instead of a penalty for late payment (.5% of the balance due per month).

Of course if "Sam" owes you a refund it really doesn't matter - you will only be penalized if you owe "him" money. If you are getting a refund you can file your 2005 Form 1040 on April 15, 2008 and you will not be penalized.

I just returned from the Post Office where I sent off my 2005 Form 1040.

As the final deadline for extended returns, today can also be considered to be the official end of the tax filing season - my 35th season in "the business". This milestone has caused me to wax nostalgic about the "good old days" of the tax profession and how tax laws, regulations and procedures have changed over the years.

Those were the days, my friend -

* when a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),

* when "Employee Business Expenses" were an adjustment to income and not an itemized deduction subject to a 2% of AGI exclusion,

* when there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,

* before all the acronyms (PIG, PAL, ACRS, MACRS and so on),

* and when one-half of long-term capital gain just disappeared from the tax return.

I started my career in February of 1972, preparing 1971 tax returns, when a deduction was really worth something and everyone itemized. As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!"

In 1971 the top tax rate was 70%. There was a "minimum tax", not yet alternative, and a "maximum tax" (i.e. the maximum tax on "earned income" was 50%). While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form. The Alternative Minimum Tax did not begin to affect out clients until the 2nd half of the 1990s.

I went to work for James P Gill, my uncle's tax preparer, during my first year of college, with no experience preparing tax returns. I had never prepared a tax return before, not even my own! My education consisted solely of the freshman semester of "Accounting 101".

I learned the business the absolute best way possible - by actually preparing returns. On my first day of work I was given a briefcase containing a client's current year "stuff" and a copy of the previous year's return and told to "jump in and swim". If I had a question I would ask Jim, blessed with the patience of a Saint (a trait I soon learned was essential for a tax preparer), who would stop what he was doing to explain the answer to me.

I worked in a true "storefront" office on the fringe of Journal Square, Jersey City's equivalent of Times Square (made famous in the "Jersey Bounce", which "started at Journal Square"), where we dealt with what Jim affectionately referred to as "the great unwashed masses" on a daily basis.

There were no computers in those days. During my first few years we did not even have a copy machine in the office. Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House. To this day I still prepare all my 1040s manually - in 35 tax seasons I have never used tax preparation software to prepare a return.

As I started out in the tax preparation business the matching of 1099s to 1040s had just begun. I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.

Back then a tax preparer was truly in many ways also a "father confessor". One day a widow came into the office dressed in her black mourning outfit and waited to see Jim. Once in the "inner sanctum" she confessed that while her husband was alive she filed a joint return with him, prepared by our office, claiming only his income, and she also filed a single return, elsewhere, under her own Social Security number to report a small pension she received in her maiden name. In those days only the Social Security number of the husband was required to be entered on the return - and not that of the spouse. After giving her "absolution" Jim commenced to fix the situation.

During my early years you were also not required to list the Social Security number for dependents claimed on your return. One year a married client, let's call him John and call his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George. The college student who prepared the return that year (not me) listed as dependents John, Mary, Paul and George. The client received the refund requested on the return without question.

The next year John came in and stayed while I prepared the return. I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George! The John and Mary he had listed on the sheet the previous year was apparently he and his wife. It appears that the student who had prepared the earlier return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.

At the recent IRS Tax Forum it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents disappeared from tax returns.

Over the years, due to our proximity to New York City, we prepared the returns of some "semi-famous" taxpayers. One year in the late 1970s we prepared the 1040 for the then captain of the New York Giants football team, who was partner in a local restaurant with one of our long-time clients. This was well before the days when professional athletes all had multi-million dollar contracts, but I do recall being surprised that his W-2 was only $100,000+. FYI, this person was one of the rare clients, I can count them on the fingers of one hand, who "stiffed" Jim over the years.

When the drummer for the original off-Broadway production of ONE MO' TIME became sick and a local union musician, whose return we prepared, took his place we welcomed as new clients most of the members of the cast, who came up to New York from New Orleans where the show had originated. It was the first year we added the Louisiana state income tax return to our repertoire. I remember having complimentary tickets for the show upstairs at the Village Gate and going backstage after the performance to deliver finished returns. We also did the tax returns for the road company.

Our clients were extremely loyal. If they moved out of state they would continue to mail their tax returns to us. We had one client who had retired to the Netherlands and still had us prepare her 1040!

Some clients were also compulsively consistent, coming in to have their returns done on the same day each year. Back when Abe Lincoln had his own separate legal holiday February 12th was a busy day for us, especially with teachers. We also had our share of clients who would wait until the very last day of each tax season, generally April 15th, to come in. When we saw Wally Weinmann, usually the last person on the last day, we knew that it was over! We even had a tv repairman who was always a year and a day late - he would come in on April 16th of 1975, for example, to have his 1973, not 1974, tax return prepared!

Of course in the "good old days" we never filed an extension. We finished all the returns on April 15th - even if we had to stay up until 3 am to do so!

A lot has changed since those days. Reagan completely rewrote the tax code with the Tax Reform Act of 1986, doing away with a lot of the loopholes and deductions we had used to work magic. Jim decided to retire when he turned 75 and handed his practice and office over to me. He would come in to help during the last weeks of the season until he passed away three years later.

As you may know, I now work out of a home office and no longer take on new clients. While I do not miss dealing with the "great unwashed masses" I do miss the "good old days". Every now and then a long-time client, faced with a large balance due to "Sam", will ask if we can Income Average and I think back to the days when we could "pull a rabbit out of a hat".

And of course, most of all I miss the days when come April 15th it was truly over - and we didn't have to spend the next six months dealing with GD extensions!

Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.